7.1 Introduction

Investment patterns of the private sector are an important aspect when analysing the overall impact of public expenditure on non-oil economic growth in Bahrain, Oman and Qatar. Large increases of public expenditure during years of high oil price levels exerted not only a direct impact on non-oil economic growth patterns but shaped the latter also by influencing private sector investment activity.

The link between public expenditure and private investment in Bahrain, Oman and Qatar differs from that in most other countries. Most importantly, public expenditure in the GCC countries is largely funded by external oil and gas export proceeds and not by taxes on domestic households or private businesses.

Therefore, strong increases of public expenditure like those seen during the years of the two oil price booms (1974-1985, 2002-2013) typically do not necessitate increases in taxes or higher levels of borrowing at domestic banks and, hence, do not limit the financial resources for private sector investments. Instead, the increases in public expenditure particularly during the 2000s were accompanied by a surge in private investment activity. This, in turn, can be ascribed to the finding that public expenditure in all three countries exhibits a much stronger tendency to crowd-in than to crowd-out private investment.

A crowding-in effect is particularly observable for large-scale public investments in the economic infrastructure which aimed to improve the production conditions for the private sector markedly (build-up economic cities and wholesale ports, expansion electricity production capacities). Furthermore, public and private investment levels were both elevated as the governments in all three countries formed several joint ventures with private sector investors, most notably, in capital-intensive manufacturing industries (e.g. chemicals, fertilisers, aluminium). With regard to the build-up of production capacities in these industries, private investment can be seen to have amplified the impact of public expenditure on non-oil economic growth in Bahrain, Oman and Qatar markedly.

Apart from raising economic activity levels in different non-oil sectors, the interplay between public expenditure and private investment also shaped the characteristics of non-oil economic growth dynamics lastingly. The country studies in chapters 4-6 highlighted that non-oil economic growth in Bahrain, Oman and Qatar over the last decades was primarily driven by an accumulation of the factor inputs physical capital and labour and not by sustained improvements of labour productivity.